Dear Mr Tan
You have recommended to invest in government bonds. It now earns less than 3% p.a. and you have to lock it for 5 years or more. I do not find it to be attractive. Is there a better return from other safe investments?
----------------------------
REPLY:
If you wish to have a safe investment, it is better to buy government bonds to earn 3% p.a. for 5 years, or a total of 15%, instead of investing in a financial product that requires you to bet on the outcome of certain stocks.
Many people invested in the financial products during the past years, and obtained a poor return of less than 1% p.a. For example, the Swing fund gave a return of 2% for 5 years, or just 0.4% p.a.
If you do not wish to lock up your money to earn 3% for 5 years, you can invest in a money market fund and earn about 2% p.a. at the current rate. If interest rate goes up, your return will increase, and it changes with the money market.
Saturday, June 16, 2007
Fund earned 20% during past 8 months
There is an advertisement showing that a unit trust earned 20% since its launch 8 months ago.
Before you invest in this fund, you have to consider the following:
* many other funds also earned a similar or better return
* the upfront cost of investment is 5% (which is high)
* the stockmarket is now at a high level and is risky
If you invest in the stockmarket now, you should be prepared to suffer a correction (ie drop in prices), if it happens.
Do you want to take the risk?
Before you invest in this fund, you have to consider the following:
* many other funds also earned a similar or better return
* the upfront cost of investment is 5% (which is high)
* the stockmarket is now at a high level and is risky
If you invest in the stockmarket now, you should be prepared to suffer a correction (ie drop in prices), if it happens.
Do you want to take the risk?
Cost of betting on a financial product
Dear Mr Tan,
If I invest in a financial product that guarantees a return of my principal, I know that I will not lose out. At least, I will get back my investment. If the stocks meet the target, I will get a good return. What are your views?
-----------------------------
REPLY:
You should look at the opportunity cost. For example, instead of investing your money for 5 years in a financial product, you could have bought government bonds to earn 3% p.a. for 5 years, or 15% in total.
If you invest $20,000 in a financial product, you are actually spending $3,000 on the bet, ie 15% for 5 years.
In thecase of the Swing fund, you got back only 2% after 5 years, or $400. This is a poor bet, compared to the cost of $3,000. Your payback is less than 15% of what you betted (ie $3,000). This is a poor return, considering that the stockmarket performed extremely well during the past 5 years.
Lesson: Do not bet on a financial product, as the odds are designed to your disadvantage.
If I invest in a financial product that guarantees a return of my principal, I know that I will not lose out. At least, I will get back my investment. If the stocks meet the target, I will get a good return. What are your views?
-----------------------------
REPLY:
You should look at the opportunity cost. For example, instead of investing your money for 5 years in a financial product, you could have bought government bonds to earn 3% p.a. for 5 years, or 15% in total.
If you invest $20,000 in a financial product, you are actually spending $3,000 on the bet, ie 15% for 5 years.
In thecase of the Swing fund, you got back only 2% after 5 years, or $400. This is a poor bet, compared to the cost of $3,000. Your payback is less than 15% of what you betted (ie $3,000). This is a poor return, considering that the stockmarket performed extremely well during the past 5 years.
Lesson: Do not bet on a financial product, as the odds are designed to your disadvantage.
Look for Solutions Not Scapegoats
Dr. Lee Kum Tatt is a chemist. Looking at and for solutions has been his profession all his life. Read the article in his blog on how his own quote has given him peace of mind in his life.
Subscribe to:
Posts (Atom)